Financial Terms: The ultimate glossary
The world of finance can be complicated and it’s easy to get confused and intimated when faced with all the technical financial terminology. Unless, you specifically decide to study finance, these terms are not something that is widely taught – however we are expected to know them. This blog post has been written to help remove these barriers. Familiarising yourself with some of the most common financial terms will better prepare you when faced with any unfamiliar financial situations.
It should give you more confidence when dealing with your personal finances, and is a good reference point if you come across any additional terms. So, read on to start expanding your financial vocabulary.
Amortization – Loan amortization refers to paying off debt over a pre-determined period, with fixed payment amounts. It is often used when referring to paying off car loans or a mortgage. The way it works is that with each payment, the amount you pay in interest decreases and the amount you pay towards the actual loan increases.
Annual percentage rate (APR) – It is the interest rate that is charged on a debt, which is expressed as a yearly percentage rate. It includes any fees or additional monthly costs of borrowing the funds. It is a useful figure in helping borrowers to compare the cost of borrowing a personal loan.
Assets – Assets are property or things that you own and that have value. Examples of assets are vehicles, machinery or equipment, buildings or land. In business, you can have tangible or intangible assets. Whereby, tangible assets refer to the physical assets as mentioned just above, and intangible assets refer to things like a brand, that has value but it’s not physical.
Bankruptcy – it is a legal process that people must declare when they have too much debt and cannot repay it. You enter a legal agreement whereby a trustee is appointed to your case. They pay the creditors you owe, and then you repay the creditors over a period, usually a few years. Whilst declaring bankruptcy can give you a fresh start, there are some consequences. You can’t borrow credit for 5 years, you may not be allowed to travel and it can even affect your employment.
Break fee – this is a fee that the borrower must pay if they want to get pay the loan off earlier or move to a mortgage loan which has a lower interest rate.
Bonds – purchasing bonds is a type of investment. Investors purchase bonds which is in fact loaning money to a corporate or governmental entity, which help fund different projects or activities within that organisation. It is a way for organisations to raise money instead of getting a loan.
Budget – refers to an estimated set of expenses for a certain period. It is meant to be used to stop you from spending more than you can afford, and can be adjusted and re-evaluated over time. It is an effective way of keeping tracking of spending, and keeping track of targets. Going over budget means you have over spent, and going under budget means you have under spent.
Capital – it refers to the value of a person or organisations financial assets. It could be in the form of money or valuable assets. Examples of capital include buildings, vehicles or patents.
Cash advance – cash advances mean getting money earlier than you expected to receive it. It can be from your employer, if you ask to receive some of your income early. It could be from Centrelink, which is getting some of your income support early. Or it could be a short-term loan from a financial institution or an alternative lender. You can also get cash advances from credit card issuers.
Cash flow – cash flow refers to the amount of money that is coming in and out of a business over a certain period. It can often be looked at the difference between income and expenses over I dynamic period. It’s always best to have surplus to keep a positive healthy cash flow, in case anything unexpected occurs.
Credit – it is where someone borrows money in advance, with an agreement to pay later. Credit cards, or loans are forms of credit.
Credit rating – It refers to your history with credit. It is a rating given on a scale from 0 to 1200, with the higher the number the better. Lenders look at your credit rating to decide whether they should lend credit to you or not.
It takes into consideration, factors including the length of your history using credit, how good you have been with paying your bills on time and how much outstanding debt you have.
Debt Agreement – a debt agreement is an act of bankruptcy, though it’s not bankruptcy. It’s a form of debt consolidation, whereby your debts get settled and you can repay these debts with one repayment.
Debt consolidation – it refers to putting all your debts into the one place. It is a responsible way of tackling multiple debts by turning them into one payment. It helps you to save paying heaps on multiple interest rates.
Direct debit – this is a type of payment method, which involves the regular payment of fixed amounts over a certain period. It is an automatic payment that you set up with your credit or utility provider. It is a useful way to pay off a loan or pay regular bills.
Diversification – this refers to the diversification of your investments so that you’re not putting all your eggs in one basket. It means that if one of your investments isn’t doing too well, it’s okay because you have made investments elsewhere which should hopefully be doing better.
Dividends – is an amount of money that an investor earns from holding shares in a company.
Equity – it can be defined as the difference between an asset and all the liabilities associated with that asset. Assets – liabilities = equity. Equity also refers to ownership. To give you an example: a person who owns a car or a house and has paid off the loan, means that it is the owner’s total equity.
Fees – these refer to the costs associated with borrowing money. Fees will vary depending on what type of credit you borrow, and will also vary depending on what lender you choose to borrow from. Responsible lenders will be transparent with the fees associated with borrowing money from them.
Fixed interest rate – this refers to the rate of interest on a loan, that is fixed at pre-determined amount at the beginning of the loan term. It means that it protects you from market fluctuations that raise interest rates very high.
Inflation – it is an economic term which refers to the rate at which the prices of goods and services increase over time. As an inflation rate continues to rice, the purchasing power of a currency starts to fall.
Interest – It is that rate at which you are charged for borrowing a certain amount of money. Interest rates It can be fixed or variable. It can otherwise be defined as the cost of borrowing money.
Instalment loans – these refer to loans that you repay over certain period with fixed, equally sized, regular payments.
Investment – an investment refers to an asset that you purchase that has the purpose of earning you money. An example of an investment is property or buying shares in a company.
Liability – this is the opposite of an asset. It refers to something that drains money from you. An example of a liability is debt.
Lender – A lender is defined as someone who lends money. They can be a financial institution such as a bank, or they can be alternative lenders such as online personal loan providers. Their role is to lend funds, often in the form of loans that can be repaid over a pre-determined period. There are fees associated with borrowing money, and these will vary from lender to lender and loan types.
Liquidity – this refers to the rate at which an asset can be turned back into cash. How liquid something is, means how easily can be turned back into cash. Stocks are considered more liquid because they can be sold quickly and turned into cash, whereas a house is considered less liquid as it takes longer to turn it into cash.
Loan – a loan refers to an amount of money that that is borrowed and then repaid over a pre-determined period.
Maturity date – it refers to the end of the agreed loan term, whereby the principal amount of debt is due to be repaid to the lender.
Mortgage – it is a legal agreement that a borrower makes with a financial institution who lends money (with an interest rate) to pay for the remainder of a property. Mortgages usually cover 80% the value of a house, sometimes less. They are normally for a term of up to 30 years.
Overdraft – An overdraft is an agreement you have with your bank that allows you to over draw money from your cash transaction account. Essentially it allows your account to go into a negative balance. It’s only meant for short falls in cash flow and isn’t supposed to be a permanent solution.
Refinance – this refers to switching loan providers to get a better interest. People commonly refinance mortgages as this can end up saving them thousands of dollars in the long term. It’s important to do your research before refinancing any loan is it could also end up costing you more if you haven’t familiarised yourself with the terms and conditions of the new loan contract.
Return – it means the money you get back from your investments. There are positive returns and negative returns. Often when you invest in something that promises higher returns, the risks are higher too. Less risky investments will often how lower returns.
Repossess – this refers to when a bank or other credit lender, takes ownership of an asset to pay off any outstanding debt. This can have occurred when you take out a secured loan, which means that the loan is secured by an asset.
Risk – Risk refers to the chance you take when making an investment. Something that is very risky means that you have less chance of getting something back from it.
Secured Loan – a secured loan is a type of loan that needs to by tied with an asset as security for the loan. Lenders like to have a security to back the loan in case you couldn’t pay for it for whatever reason. It is a way for them to protect themselves.
Shares – they are parts of the business that people can buy so that they have some ownership in the company. They can also be called equities or stocks. Shareholders earn back dividends from their shares and can sell them off when they increase in value.
Stocks – a stock is another word for share as mentioned above. It a share of the ownership of the company.
Superannuation – is the Australian term for a retirement fund. It is an arrangement that helps citizens to build up funds for their retirement over the duration of their careers. It is compulsory to have superannuation and is supported and encouraged to be used by the Australian government.
Unsecured Loan – an unsecured loan is the opposite of a secured loan. It means that the borrowers take out a loan that is not secured by an asset. This is a riskier investment for lenders so they will check your credit rating to see whether they should lend to you or not.
Variable interest rate – this type of interest rate in contrast to a fixed interest rate means that it changes in response to the market. It can go up or down. When it goes down it is a good thing, because you don’t have to pay as much in interest. Whereas if it goes up, you must pay more. Having a fixed rate of interest prevents you from experiencing lower interest rates, but it protects you from being hit by higher interest rates.